If you’re a seasoned investor, you’ll likely agree with the adage “buy low, sell high.” However, bear markets can be deceptive as they give the illusion that you are buying short, but before you know it you are below several other basis points in your portfolio.
In an article last month, we reported on the SPY (NYSEARCA:SPY) where we thought the S&P 500 and the SPY, which tracks the S&P 500, could be called downtrend. We were not entirely correct in our analysis as both the index and the SPY have traded sideways. Still, we’re bearish on both at the moment; Why here?
Data from YCharts
emphasize proximity again
As in our previous article, I want to summarize the closeness between the SPY and the S&P 500 index as it is important to establish correlations before using the data points.
As the chart below shows, the SPDR S&P 500 Trust ETF tracks the S&P 500 with an error of just 0.04% on a 1-year basis, 0.07% on a 3-year basis, and 0.06% on a 5-year basis. year base after. Therefore, given the close proximity between the SPY and the S&P 500 index, it is possible to analyze their long-term prospects together.
from a statistical point of view
Statistical indicators are valuable tools to draw transparent conclusions.
The key metric to use is the Fed’s valuation model, which draws valuation conclusions based on S&P 500 earnings yields and US 10-year bond yields.
Yields on US 10-year bonds remain below earnings, according to Yardney Research. Nevertheless, it is trivial to observe the trajectories of the two metrics. The history implies that the bond yield is growing faster than the earnings yield. Therefore, there is a possibility of divergence, which means that the index will soon cross a statistical standpoint.
Additionally, the market cap of the US equity universe trades at a premium of around 1.56 times GDP, which is concerning considering that the chart below also shows that there is an inverse relationship between market cap and GDP. In addition, it is clear that most of the index’s gains were realized in the last twenty years, following the housing crisis (2007/08), when economic stimulus combined with low inflation led to an increase in asset prices.
Let’s add some substance to the statistical observations by looking at some macroeconomic data points.
I want to start by looking at the PMI data. I was quite surprised when I read some market reports that suggested the global PMI is falling despite the reopening of the pandemic in China. I firmly believed that reopening manufacturing facilities in China would make a significant difference on the supply side of the economy, which clearly is not the case.
Also, the US PMI data suggests that demand in the economy is softening, which was actually something I was expecting.
The decline in US consumer spending is clearly visible in the Treasury yield curve. For example, the curve implies that interest rates could be above 3%, which means that the contractionary economic policy is on the way to an end.
Both the SPY and the S&P 500 are full of technology, consumer cycles and industrials, all of which can come under severe pressure in terms of monetary contraction as they are high beta cyclical industries. As such, it is unlikely that the valuation of the S&P 500 will be favorable to investors if interest rates move as the yield curve implies.
If you’re a spy bear like me, here are some entry points.
Based on technical analysis, I see two bearish entry points for SPY. First, if the market turns into a temporary bear market, there is resistance near $396. Alternatively, if there is no bearish rally and the market keeps falling, there is bearish support near the $357.50 level.
Although I have noted some similarities in the previous sections, more counterarguments are needed.
An alternative argument could be that the S&P 500 has bottomed and this could be an attractive time to invest in a downtrend. In addition, rising interest rates could reduce inflation, which could revitalize the purchasing power of the US economy.
In addition, China is considering a $200 stimulus package and the US is waiving various renewable energy tariffs, which could boost the economy and lift us all out of this bear market.
Finally, basic GDP growth data points tell us that the US will only suffer negative growth if there is a systemic shock. Therefore, it is difficult to bet against the US economy and its stock market.
We believe that much needs to be diluted before SPY can be brought back to investable levels. Statistical models and economic theory tell us that the index is unlikely to recover anytime soon. Furthermore, technical analysis implies that bearish levels are in place.
Whether you are bullish or bearish on the US stock market, it is worth considering the content of this article before making an investment decision.